Investors have slightly bid up the share price of Nvidia Corporation (NVDA) ahead of the company's fiscal fourth quarter earnings announcement. Analysts expect the chipmaker to report $1.22 in earnings per share (EPS) and $7.43 billion in revenue. These figures represent a year-over-year increase of 58% and 48%, respectively. Investors could also be hopeful after share of the company's main rival Advanced Micro Devices, Inc. (AMD) rose following a positive earnings report earlier this month.
Semiconductor stocks, despite facing increasing demand amid a chip shortage, have largely underperformed the market as a whole recently. Nvidia has been near the low end of sector performers; however, investors could be looking forward to new variants of flagship graphics processors recently discussed at the Consumer Electronics Expo.
Option traders appear to be placing bullish bets on the Nvidia share price in the near term. The open interest for Nvidia seems to illustrate that traders are buying call options and selling puts. While the open interest does appear to feature a large number of premium collectors, a growing number of call options and implied volatility suggest that traders are buying upside calls while selling downside puts.
- Traders and investors bid up the share prices of Nvidia ahead of the company's earnings report.
- The share price has recently closed slightly above its 20-day moving average.
- Calls are priced higher than puts after accounting for intrinsic value.
- Call and put open interest appears to be positioned for the share price to rise in the near term.
- The share price has recently drifted higher as investors consider that Nvidia rival AMD produced better-than-expected earnings results.
Recent Semiconductor Industry Performance
Nvidia is one of the top names of the semiconductor industry, which has been plagued by shortages since the beginning of the COVID-19 pandemic. This shortage has had an effect on everything from personal computer availability to automobile manufacturing. Nvidia is a top holding of iShares' Semiconductor ETF (SOXX). Despite the high demand, the industry has underperformed the market of late. The chart below compares the recent performance of Nvidia with the top holdings of SOXX.
It's notable in this chart that there is not much deviation from performance in the industry. Chip shortages have put pressure on companies in this industry to produce, which has translated into downward pressure on share prices. Only two of the top ten holdings of SOXX have outperformed State Street's S&P 500 Index ETF (SPY)—Micron Technology, Inc. (MU) and Taiwan Semiconductor Manufacturing Company Limited (TSM). Nvidia remains near the bottom of the industry in terms of recent performance, despite boasting the largest market cap.
An analysis of recent option activity combined with technical analysis of share price movement can help chart watchers gain valuable insight into the overall sentiment toward Nvidia stock. The chart below depicts the recent price action for the Nvidia share price as of Monday, Feb. 14.
This chart highlights how the Nvidia has maintained a near constant downward trend following the prior quarter's earnings announcement. The Nvidia share price drifted from an extreme high of the volatility range in mid-December to an extreme low of the range by early February. This trend is highlighted by the red arrow. Recently, the Nvidia share price has drifted higher, briefly rising above its 20-day moving average. This recent share price activity is highlighted in blue.
The purple bands on this chart are an extreme historical volatility range formed by 4 standard deviations of 20-day Keltner Channel indicators, which depict price levels that represent a multiple of the average true range (ATR) for Nvidia stock. ATR is a standard tool for illustrating historical volatility over time. These bands could be considered to represent the extreme ranges of option pricing.
It's notable that these bands narrowed slightly in the early portion of 2022 and have been widening slightly ahead of earnings. This could mean that investors are unsure of which direction the Nvidia share price will move after the company reports earnings.
Volume Profile and Options Look
Comparing price action and option trading can provide chart watchers insight into the sentiment traders and investors hold toward a company's future performance. However, further context of price action in terms of volume could illustrate areas of support and resistance, which could provide additional context to option open interest. The chart below illustrates the recent price action of Nvidia, in addition to a price-based volume pattern on the left side.
This price-based volume pattern depicts the prices where investors have bought and sold the shares previously. A noticeable amount of buying in the past often implies that investors will feel the desire to defend their positions at those same prices by buying more shares or at least not selling any further. When volumes at a given price are low or nonexistent, it implies that few, if any, investors have the need to defend their positions at these levels.
What's notable is the long red bar across the chart. This price level is known as the "point of control" for the volume profile and represents the point at which the greatest contention of price action takes place based on volume. It's notable that this price level is around the $300 range when considering option open interest numbers.
Option trading can provide chart watchers additional context to help them form an opinion about expectations that investors may have. Recently, option traders are favoring calls over puts by a significant margin. On Monday, Feb. 14, there were over 222,000 calls traded compared to 121,000 puts. Normally, this volume indicates that traders are feeling bullish toward the upcoming earnings result, although further analysis is required.
The open interest for Nvidia is currently nearly even, with roughly 1.3 million calls and puts in the open interest. This is neither bullish nor bearish without considering the context of this open interest.
For Feb. 18, the next monthly option expiration date, the highest open interest is on the $300 call with 24,000. This represents $23% upside to the current share price. The Feb. 18 expiration features 281,000 calls compared to 220,000 puts in the open interest, which skews bullishly.
The high open interest on the $300 call coincides with the point of control on the volume profile. However, it should be noted that the next significant open interest is on the $260 call, with 22,000. This represents 7% upside, which is less than the currently implied move of 9.5% based on straddle pricing.
Implied volatility also paints a further picture on this open interest. Implied volatility for upside calls is rising while the open interest is rising, suggesting that option traders are taking long positions in these options. Conversely, implied volatility for downside puts is falling as the open interest is rising, indicating that traders are selling these options.
It's possible that the earnings results of Nvidia could have an effect on indexes directly. A positive report could lift other stocks in the industry such as Taiwan Semiconductor or AMD. No matter what the report says, the Nvidia earnings could affect exchange-traded funds such as SOXX, State Street's Technology Sector ETF (XLK), or Invesco's Nasdaq-100 QQQ Trust (QQQ).
Investors will be anxious to see if Nvidia can match rival AMD with an earnings beat and share price increase. While the company has increased expectations from the same quarter a year ago, option traders appear to be placing their bets on upside for Nvidia stock. That's because a rising number of call options in the open interest and implied volatility imply a bullish sentiment. If these bets were to unwind, it could place unforeseen downward pressure on the already beat up Nvidia share price.